The Great Cost-Shift
Ian Morrison specializes in long-term forecasting and planning with particular emphasis on healthcare and the changing business environment.
He sat down with Leader’s Edge to discuss hospital bills from both the patient and provider perspective, the politics of repeal and replace, and how some providers are already preparing for a Medicare-for-all kind of world. He also addresses employers’ role in long-term change for our healthcare system.
So things that are really expensive are, for example, a day in an ICU where you’ve got seven full-time equivalents per patient. It’s hard to charge what it really costs for that in a way that is defensible. So they end up creating these bills. …The lab test that nominally the marginal cost would be $80 is $800. It becomes a revenue-capturing vehicle that isn’t really tied to the true underlying cost of delivering the service. So that’s frustration number one.
Frustration number two is, you don’t know it in advance. And unfortunately, where the consumer is on the hook, particularly in the outpatient environment and particularly in the initial stages of deductibility, it comes as a complete shock, right? Nobody tells you in advance you’re going to write a check for $1,500.
So on the one hand, the industry does a poor job of actually measuring what things cost and attaching prices to the real thing. And then there’s a communications failure, which is basically that you don’t know in advance and you end up getting these enormous surprises at just the wrong time. It’s like a perfect storm of indignation.
So, basically, what all hospital systems do is charge private insurers at least 120%, sometimes 300%, of Medicare to make up for the difference. That’s the cost-shifting piece. Then you apply it…to a procedure, which as I explained at the beginning, is not accurately cost accounted, and it multiplies the error in some sense. And the consumer is left going, “Seriously? That can’t be right. How can an aspirin be that much?” There’s a certain lunacy to it.
But all they’re trying to do is get the revenue they need to cover the services they provide with some margin. And they back into charges out of that goal.
So they’re tightening their belts and seeing their margins erode, quite frankly. The first 2017 numbers are all horrible for most hospital systems I’ve seen the numbers for. And that’s part of this broader squeeze. You know, expenses are rising, people are being paid more. You’ve got to subsidize the docs. The technology is expensive. The drugs keep going up, and the people up the food chain are trying to dampen costs. So I think there’s real interest conceptually in trying to live in a field of level reimbursement.
But getting from here to there is a tough one to pull off because most hospitals in America are 15 to 20% away, minimum, from making money on Medicare and are reliant on that cost shift to stay afloat. So it is very threatening.
My work with Leavitt and Stanford is still in progress, but from our initial pass, I would say the hospitals [that met our cost/quality criteria]—and there were not many of them—tended to be ones that were passionate about cost management and had a long history of doing that. And they were in markets where they didn’t have the luxury of much cost shifting, whether because the population wasn’t growing or they just had a disproportionate share of their revenue coming from Medicare and Medicaid and not a lot of commercial.
And it’s appealing. The only downside I see on these rate settings things—well, there’s a lot downsides. How do you administer it? Suppose you had been a hospital that was doing all the hard work to reduce costs and all of a sudden somebody came in with an arbitrary price that was tied just to Medicare.…I always worry about the unevenness of the application with an arbitrary across-the-board scheme in that you create winners and losers and it may not be, quote-unquote, “fair.”
I think this is going to be floated as a policy proposal, especially because the more moderate Democrats are recognizing that only a third of Americans would go for single payer, but you could probably build a broader coalition for what they’re calling Medicare-X, which is allowing Medicare buy-ins and the use of Medicare fee schedules in a public option that is available to more Americans and to more employers.
It’s a very different CMS under a Trump administration than it was with Obama. Andy Slavitt at CMS in the Obama administration was trying to push his team to imagine what’s possible in payment reform and go 10% faster than that. Sometimes they overreached. But Secretary Price and Seema Verma’s signal to the market was, “No, we’re not doing mandatory. We’re doing voluntary. Yeah, we’ll do that but maybe later. Well, MACRA [Medicare Access and CHIP Reauthorization Act of 2015] is good, yeah, but we’ll exempt even more people and slow the timetable down.” So that’s not gone unnoticed by the [field].
It’s not that people think payment reform is being undone. It’s just that the sense of urgency and speed is undone. And I don’t think employers are capable of driving it without that.
I think employers are coming to the payment reform issue. They are doing it with increased vigor and attention. Their problem is they can’t coordinate in a meaningful way to impact providers in given geographies because they have different strategic priorities and it’s hard for them to operationalize a kind of kumbaya strategy, just in the Bay Area, even, for example.
Look at a company like GE, which is massive, but it doesn’t have more than 12,000 or 15,000 lives in any one place. And the companies who do are public employers. So states, big governments, school boards and so forth, they’ve got more concentrated fire power but ironically they are the most brain dead with regard to employee benefit innovation—with the exception of CalPERS and a few others. The people with the most generous health benefits in America are school teachers and firefighters, probably, legitimately, but they’ve been less aggressive on the cost management side than almost anyone.
But your point is right. Both [Republicans and Democrats] in their own way are ignoring the fundamental problem, which is the health system is too expensive. The Republicans made enormous political gains in the last seven years, and all they had was repeal and replace and cutting taxes. The goal was not to cover more people and reduce cost. The goal was repeal and replace, politically. It was to say you’ve done that. And to cut government spending. They were trying to get rid of something and cut what they saw as another entitlement that was badly crafted. And if you can’t deliver the first one, you know, come on. You’ve got all the leverage of government. So that’s where I think the frustration on the right is coming from.
Now, the Democrats would say, like in Massachusetts, once you get the coverage thing done you can manage cost. I was just in Massachusetts last week, you know, and they’ve got this commission and the commission basically says we’ll monitor if you go over whatever the number is—3.5% GDP healthcare growth per capita. And they came in at 2.8, and everyone was declaring victory.
Well, that’s fine and dandy, but Massachusetts has the highest per capita healthcare cost in the known universe. It’s fair enough to slow your costs when your costs are enormous. It doesn’t solve the problem that we all have, which is the stuff is too expensive. And the bottom line is healthcare cost equals healthcare incomes. If you start taking cost down, somebody’s income has to go down. Either fewer people or they make less money. That’s how it works in every other country. The reason it’s cheaper in other countries is people make less money doing the same thing. Way less money. The prices are much lower. It’s not that utilization is lower. It’s the prices are lower for the same thing. That is very threatening to everybody.
Per capita national health expenditures in 2015.
Total national health expenditures in 2015.
Total national health expenditures as a percent of GDP in 2015.
The amount of growth in covered workers’ average out-of-pocket costs from 2005 to 2015.
The growth in wages from 2005 to 2015.
Sources: Centers for Disease Control and Prevention, Kaiser Family Foundation